The Devalued Chancellor

by George_East on February 25, 2013

Amidst all of the baying for Nick Clegg’s blood in this morning’s rightwing newspapers over the Rennard affair, you would have been forgiven for not noticing the other big news of the weekend: Moody’s decision on Friday evening to downgrade British sovereign debt from AAA to AA1. Before moving on to the implications of that decision, I would like to pose a question for you.

Which other of these Chancellors saw British debt downgraded in his tenure as Chancellor of the Exchequer?

(a) Denis Healy during the Winter of Discontent, as unemployment and inflation soared and Britain (at least as folk-memory has it) ground to a halt;

(b) Geoffrey Howe as unemployment reached heights that had not been seen since the Great Depression and British industry was hallowed out?

(c) Norman Lamont as Britain was unceremoniously kicked out of the ERM, with interest rates at 15% and unemployment again over 3,000,000;

(d) Alistair Darling as the biggest economic crisis since the 1930s overwhelmed the world economy, we came within a matter of hours of the entire banking system freezing up and GDP plummeted through the floor.

The question is, of course, a trick. The answer is none. No other Chancellor, even in the direst of circumstances of the British economy over the last 30 years has presided over British debt being rated anything other than AAA. George Osborne is unique in his achievement. Since Moody’s has continuously rated British sovereign debt in 1978, Britain has always had a AAA rating.

Now, in one sense, who cares? The ratings agencies, as we have said before on this site, are highly compromised entities and their ratings are of dubious worth and little predictive value. They all rated the toxic CDOs and CDSs at AAA in the run up to the financial crisis. Similarly when Fitch downgraded US debt during the debt ceiling brinksmanship between the White House and Congress in 2011, the response from the markets was not to exit US debt, as one would have expected if the ratings agencies were performing a service of value, but a flight to US government debt.

The truth is that the ratings agencies at best follow the sentiment of the market, rather than create it. At worst their relationship with their paymasters, the banks, is such that their judgments simply cannot be taken seriously. Some have accused them of even worse.

Indeed the reaction of the markets for UK bonds this morning has been entirely in keeping with what we have seen in the US. Bond yields remain at very low levels, with no sign that British debt is becoming less attractive in the markets. The bond yield on 10 year UK Treasuries at the time of writing is 2.13%, which is actually down on a week ago, when it stood at 2.19%. Yes sterling has fallen against the Euro, but that is almost certainly a good thing for the British economy, making, as it does, our exports cheaper.

The downgrade is economically meaningless as the UK has its own currency and debt denominated in its own currency, and despite all of the scare stories put forward by this government and the press, our debt to GDP ratio (70% in December 2012) is not particularly high by historic standards (and below that of Germany and way way below that of Japan, which is approaching two and half times GDP, without any sign of concerns about debt default – Japanese bonds have even lower yields than those of the UK).

The low interest rate yields on British debts are not, of course, a measure of this government’s success, despite that being the story it likes to spin, but are in fact a measure of its failure. A healthy economy would see money flood into more attractive investments than Gilts and as a result the demand for them would fall (and their price rise). As Paul Krugman said a while back, in respect of the British economy and its persistent low yields on its bonds, ‘the wolf is at the door, but George Osborne thinks it is the confidence fairy’.

So why does the downgrade matter? It matters for two reasons.

Firstly, it was this government and in particular this Chancellor who put such store on the credit rating agencies’ view of the UK economy. The keeping of a AAA rating was one of the tests upon which George Osborne said we should judge him when he delivered the Mais lecture just before coming to power, in February 2010. Keeping Britain’s top credit rating even formed part of the Conservative Manifesto. It has been one of the central arguments put forward by this government for its austerity programme. It was necessary to implement, as otherwise we would lose our AAA rating and the invisible bond vigilantes would attack, we were told. The loss of the AAA rating, like the increase in debt and the lack of growth under George Osborne’s watch is yet another indication that his strategy has utterly failed, even on his own terms.

The second reason it matters, is Osborne’s reaction to it. So far this is, unsurprisingly, deeply discouraging. His reaction has been, bizarrely, that the downgrade vindicates his strategy. The policy reaction required, according to Gideon, is more of the same. Presumably, had the AAA credit rating been kept, Osborne would have also claimed that his strategy was working. Therefore, what this reveals (at least if taken on its face) is that there is nothing that would change Osborne’s strategy. Austerity, austerity, austerity for as long as the eye can see.

Plainly, part of this is the embarrassment of the monumental u-turn that would be required by Osborne to admit that his economic strategy was wholly wrong. But given that political parties are in the business of winning elections and you don’t do that if, as this government appears determined to do, you drive the economy into the ground, there is obviously something more than sheer stubbornness or political embarrassment in play. As we have said from the beginning on Allthatsleft at the core of the ‘austerity’ programme is an ideological desire to dismantle what is left of the 1945 settlement (the virtually unreported speed privitisation of the NHS is evidence for this). If it is to be one term government (please God), the Tories are determined to leave office having irreversibly removed much of the social protection and public services upon which the vast majority of the population rely.

Now there is a cynical view about in the blogosphere and on the Twitter today that Moody’s have conspired with the Government to downgrade them now, before the budget, to enable fiscal stimulus to be included in the budget. This is all part of the peculiar zombie notion that Osborne is a Machiavellian political genius (despite last year’s budget and all the other evidence to the contrary) But even if this is part of it, we can pretty certain that any fiscal stimulus will be in the form of corporation tax cuts and assistance to the already wealthy. There will be no spending increases or money directed to those most likely to spend it.

Ed Balls was right to point out the absurdity of Osborne’s position in Parliament this afternoon:

“He has gone in a weekend from saying he must stick to his plan to avoid a downgrade, to saying the downgrade is now the reason he must stick to his plan.

He used to say a downgrade would be a disaster, today he says this downgrade doesn’t matter – but he is still warning a further downgrade really would be a disaster.

It is utterly baffling and illogical. He’s just making it up as he goes along.”

The chances though of any meaningful change from the man who is rapidly earning himself the reputation of being the worst Chancellor since Winston Churchill restored sterling to the gold standard in 1925, are about as likely as seeing any significant growth in the economy while he remains in charge.